Assessing the remedies for long-term unemployment

Abstract

High levels of unemployment are nowadays common phenomena in many countries. When people remain unemployed for long period of time they become discouraged to keep on looking for a job; whereas there are others that find no incentive to work as they are better off on social assistance than working. This research aims to give a better understanding of why this phenomena needs to be tackled immediately as it has long lasting effects on the economy. The main policy tools used by governments to combat long-term unemployment consist of a mixture of active labour market policies and in-work benefits. The literature review will delve more into the two main remedies that will help when tackling this problem. The two remedies are active labour market policies, used to make an individual employable and the reservation wage that will determine what people are expecting as a minimum level of income in order for them to look for a job. The relationship between the costs of labour market policies against the level of longterm unemployment is analysed. There is a negative relationship between these variables showing that an increase in cost per beneficiary will result in a drop in unemployment, as active labour market policies are an investment on labour. The reservation wage is concluded to be approximate to the median income of the respective education level. This means that jobseekers are willing to accept employment if they are offered the median wage. The reservation wage, together with the labour market policies are two important tools used as an incentive to pull people out of unemployment.